Volatile Markets! What to do!

                                 

A friend of mine called up quite late last night. She was extremely worried. L&T has come down to 1070 she said. So? Is that the reason you woke me up, I asked? I’ve lost money she said. She is not the only one who is concerned. Many have lost sleep thanks to the uncertainty in the markets.

The stock markets have been volatile since the last few months mainly due to the uncertainty in the developed markets, especially in the Euro region. Investors are concerned about the sustainability of the current economic growth rate in the domestic market as well.

Short-term investors

Usually, short-term investors look for opportunities to invest surplus liquidity in some instruments that are easy and quick to liquidate. Since the market direction is quite uncertain, it is not advisable for short-term investors to invest in equity or equity-based instruments. Short-term investors should invest in debt-based instruments such as bank deposits, liquid mutual funds, debt based mutual funds etc.

Medium-term investors

The investment horizon of medium-term investors is typically three months to a year, with the objective of making some quick money without having too much lock-in. Going by the uncertainty in the global development markets, it is not advisable for medium term investors to invest aggressively in equity. These investors can invest in diversified instruments (debt as well as equity-based). Medium-term investors should be very cautious and invest in large-cap companies. They should also follow a disciplined approach to entry and exit from positions as they do not get the benefit of many rallies or correction phases due to their short investment tenures.

Long-term investors

Long-term investors look at building their investments slowly and steadily over a long term. Usually, the investment horizon of long term investors is a couple of years or more. Analysts advise long-term investors to invest in diversified assets and have a mix of instruments such as equity, debt, commodity and property in their investment portfolio.
Currently, the equity markets are going through an uncertain phase and therefore it is advisable to avoid too many investments in equity-based instruments and park funds in other diversified instruments.

Some experts do recommend selling during a rally to book profits or exit from loss-making or under-performing stock if the markets rally and hold cash till the sentiment improves. But it would depend on whether the person is a trader or investor because both would have different reasons to do so.

As far as an investor is concerned it’s wise to stay invested and ‘don’t panic’ should be the mantra on Dalal Street. On September 26, 2007 the sensex had gone over 17000 mark for the first time. Over the next seven months it crossed several milestones to top 21000 in January 2008. But within the next 10 months it had lost nearly two-third of its value to a low of 7700 in October 2008.

 The yo-yo came back to 17000 again in October 2009 and investors’ wealth was 6 lakh crores more than what it was when the sensex had crossed 17000 mark earlier. Those who didn’t panic, made money. 20 out of 30 sensex stocks were at higher level than they were in September 2007. Agreed that the market has been volatile and there have been serious ups and down in these 2 years yet keeping faith in the long term power of Dalal Street has its own rewards. Happy investing. Stay Blessed.